Archived Information

U.S. DEPARTMENT OF EDUCATION

on

The Federal Direct Student Loan Program

June 17, 1999

Committee on Government Reform
Subcommittee on Criminal Justice, Drug Policy and Human Resources

Mr. Chairman and Members of the Subcommittee:

Thank you for this opportunity to appear here today to explain the actions the Office of Student Financial Assistance (OSFA) is taking to improve the administration of the federal student loan programs.

As the government's first Performance-Based Organization, OSFA's mandate is to improve services and reduce costs in the administration of all the student aid programs authorized under Title IV of the Higher Education Act of 1965. Our responsibility to the taxpayer is especially important in the two student loan programs, Direct Loans and Federal Family Education Loans (FFEL), which provide roughly four-fifths of the Title IV aid distributed to students each year. In Fiscal Year 1999, about one-third of total student loan volume — $10.6 billion — will be made through the Direct Loan program and about two-thirds — $20.4 billion — will be made by private lenders and guaranteed by the Federal government under the FFEL Program. Our operational plans assume these relative proportions will remain stable over the next several years.

As the Deputy Secretary has explained in his testimony, the creation of the Direct Loan program introduced meaningful competition into the student loan industry that has resulted in improved services to students and schools under both the Direct Loan and FFEL programs. It has also led to lower costs for students and taxpayers. I am committed to the effective and efficient operation of both, in keeping with our mandate to improve services and reduce costs of administering Title IV programs. We have undertaken several major initiatives in our transition to a performance-based organization that will support this goal. These include our Customer Service Task Force, a systems modernization blueprint, realigning our functions and business processes through a major reorganization, and developing with our stakeholders a five-year performance plan as called for in our legislation.

Customer Service Task Force

First, our Customer Service Task Force is nearing completion of its report that will present concrete recommendations on ways to dramatically improve service to students and our service delivery partners — schools, lenders, and guaranty agencies. The Task Force, made up of over 50 front-line employees, has been active since February, gathering information directly from students, borrowers, and our service delivery partners. They have researched operational problems and come up with creative solutions that will help OSFA deliver services equal to what consumers have grown to expect from the best in business. I have committed to pursue the recommendations included in the final report by dedicating resources and personnel to critical tasks that our customers and partners have helped us identify.

Many of the preliminary Task Force recommendations are designed to improve the quality of service in both the Direct and FFEL programs. Some of these, which will require close collaboration with guaranty agency and lender partners, are:

Improving early aid awareness and debt management counseling to ensure borrowers understand their aid options, their repayment obligations, and how best to manage their debts.

Providing borrowers, including those borrowers who hold both Direct Loans and FFELs, access to all loan information via the web or a 1-800 number.

Use of PINS and digital signatures to enable transactions to be done electronically.

Modernization Blueprint

Second, we are developing a Modernization Blueprint to guide the re-engineering of our information systems to provide program managers, employees, customers, and delivery system partners immediate access to reliable, up-to-date information. Currently, the delivery and management of Title IV assistance is carried out under 14 separate systems and 8 separate contractors.

This tangled hairball of systems evolved over the past 30 years in parallel with the addition of new programs and administrative requirements by Congress. These systems have served most of our basic needs adequately, delivering funds to intended beneficiaries as Congress intended. But they have become increasingly difficult to use and to change, thus limiting our ability to improve services to students, schools, and our financial partners.

Our Modernization Blueprint explains how OSFA will modernize its systems and the sequence for doing so. Its foundation was the work done previously under Project EASI (Easy Access for Students and Institutions), with the involvement of students, schools, and our financial partners in the FFEL program. The first public working draft was released last month. At the end of each month between now and October, we will release updates reflecting community input and additional work by our contractor, Computer Sciences Corporation. We are actively seeking ideas for improvement from financial partners and representatives from both Direct Loan and FFEL schools.

By using the latest technology now in use in the financial industry — middleware, intranet, and "wrappers" that go around existing legacy systems — our systems will be able to talk to each other, and users will be able to extract the information they need. This will benefit students, who need to know the status of their loans and other assistance. It will benefit schools and financial institutions, who need to monitor their transactions with OSFA, track students moving from school to school, and monitor their own performance relative to OSFA performance benchmarks. It will also enable us to institute dramatically improved financial management processes that monitor the flow of funds across all programs and closely track the performance of the Department's growing portfolio of direct and guaranteed loans, now valued at more than $150 billion. Some new system applications will be in place by next year. Under the Blueprint, all key systems will be re-engineered by the end of fiscal year 2002.

Reorganization

Third, OSFA will undergo a major reorganization, adopting a model used by the best in business. In the private sector, the most successful businesses organize along customer lines to allow for continual customer feedback and tailoring of services to meet their needs. In OSFA's current organization, no top managers have been clearly designated to serve the needs of our distinct customer groups — students, postsecondary schools, and financial institutions.

Under OSFA's new structure, we will have three general managers running basic operations and determining what improvements are needed to keep pace with changing expectations. A General Manager for Students will be charged with improving student and borrower awareness of financial aid options, ensuring the smooth and efficient processing of student transactions. A General Manager for Schools will provide assistance to schools to ensure they can meet program eligibility requirements, and will oversee ongoing financial and other transactions with schools. A General Manager for Financial Institutions will work with lenders and guaranty agencies, providing technical assistance, processing financial transactions, and collaborating on better ways to support the needs of students and schools.

OSFA's Chief Information Officer will provide technical support to the general managers in the development of new system applications. A Chief Financial Officer within OSFA will implement an integrated financial management system and monitor OSFA's financial performance. One of my highest priorities is creating a modern financial management system, by investing in high-end software and systems now used by industry to manage our costs, measure performance, and assess risk. We will begin implementing these dramatic changes throughout our organization soon, with substantial input from employees and the union.

Five-Year Performance Plan

Fourth, OSFA will complete development of its five-year performance plan by the end of this fiscal year. The plan will focus on achieving measurable results in three key areas: increased customer satisfaction, increased employee satisfaction, and reduced unit costs. This "balanced scorecard" approach has been used by many successful private sector corporations. The plan will be informed by the work of the Customer Service Task Force, the Modernization Blueprint, and our reorganization design effort. It will also reflect the analysis we have begun to determine the unit costs for our current operations, and strategies for reducing those unit costs over time. We will seek input on the plan from employees, program stakeholders, and Congress before it becomes final.

Cost Reduction

The concept of "unit costs" is essential for measuring OSFA's success in meeting its statutory goal to reduce costs. The Direct Loan and FFEL portfolios are expected to grow dramatically over the next five years. While Direct Loans are expected to continue to account for roughly one-third of the loan volume over that time period, the addition of new cohorts of students in this young program will increase the overall portfolio by more than 84 percent between FY 1998 and FY 2000, reaching $60 billion and over 6 million borrowers by the end of FY 2000.

The Direct Loan portfolio will more than double by FY 2004. The more mature FFEL portfolio will grow by about 26 percent during the same period to over $150 billion. These loan volume projections are based on analysis of historical data and are roughly consistent with those developed by the Congressional Budget Office.

Servicing the rapidly expanding Direct Loan portfolio represents OSFA's single largest administrative cost. The combination of two key factors will result in significantly greater costs for Direct Loan administration in the coming years: (1) the increased volume of new loans; and (2) the maturing of Direct Loan portfolio as more loans enter repayment and the number of hard-to-service delinquent loans increases. Consequently, even with significant reductions in our unit costs for administering Direct Loans, as well as FFEL and our other Title IV programs, total costs to administer these programs are expected to rise.

Significant reductions in our unit costs cannot be achieved without major restructuring of our systems and contracts. Along with our Modernization Blueprint, we are developing a new acquisition strategy that will radically change how we contract for services. Few of OSFA's current contracts are performance-based, and those that are could be improved upon. Most of our contracts dictate how contractors must perform particular processes. This approach has stifled innovation and failed to provide contractors with appropriate incentives to get the right result at the lowest cost. We will renegotiate or restructure all of our existing contracts to make them performance-based, and we will align contractor performance measures with the PBO's. Potential cost savings to the taxpayer will be a major consideration in the sequencing of contract changes.

Improvements to Benefit Both Loan Programs

Administration of the Direct Loan program over the last several years has helped the Department understand where improvements are needed in systems and processes that benefit both the direct and guaranteed loan programs. For example:

The Department's Direct Loan portfolio is currently serviced by AFSA Data Corporation , a Department subcontractor that is also a major servicer of FFEL loans for private lenders. The Department has required its contractor to follow the same regulatory "due diligence" procedures that all FFEL lenders must follow. These procedures require all loans — regardless of borrower characteristics — to be serviced in accordance with detailed procedural steps prescribed by regulation more than a decade ago. Since then, significant advances have been made in other loan sectors, where business performance is measured by bottom-line financial results. These advances use state-of-the-art technology and rely on risk analysis systems to tailor default prevention strategies based on specific borrower needs and payment experience. To improve service and reduce costs, the Department is now discussing — both with its contractor and with FFEL participants — changes to the current requirements that could reduce unnecessary administrative costs and ultimately lower the default costs taxpayers now bear.

Until recently, the Department has measured its success on default prevention by the reduction in the statutorily-defined "cohort default rate." This rate was created to eliminate high default schools from the loan program and measure the number of borrowers that default within the first two years of the repayment period. Other federal credit programs and the financial services industry track default activity over the life of the loans and use this to measure the effectiveness of their default prevention strategies. Using historical data from the National Student Loan Data System, OSFA is now instituting a life-of-the-loan default measurement system to analyze default activity by school, guaranty agency, lender, and the Department's own direct loan servicer. This will help us understand variations in default patterns and devise new strategies with our Title IV partners to lower overall default costs.

For years, rigid interpretation of statutory prohibitions against "inducements" kept FFEL participants from providing important services to schools and students that could help reduce defaults or make aid administration simpler for school and students. Through the Direct Loan program, the Department recognized the importance of helping schools provide high quality entrance and exit counseling, and simplifying administrative processes for financial aid officers and students. As a result, the Department has revised its interpretation and now allows, and encourages, FFEL participants to provide similar services.

Many Direct Loan borrowers have outstanding FFEL loans too, and they face the inconvenience of having to track and manage these loans separately. Direct Loan schools have to verify enrollment status of students transferring to and from FFEL schools. The FFEL community has begun to respond to similar problems in FFEL through collaborative efforts such as ELM Resources Incorporated, which allows students to access information from multiple lenders, and the Student Loan Clearinghouse, which provides student enrollment information to schools, lenders, and guarantors. In recent months, OSFA has begun to explore with the FFEL industry ways to make these information exchange services available to Direct Loan schools and students. OSFA's Modernization Blueprint envisions the seamless exchange of information (in accordance with privacy requirements) among students, schools, lenders, guarantors, and OSFA, regardless of the loan source.

Until this year, both loan programs required students to sign a new promissory note each year in which they borrowed. This was inconvenient for students and costly to administer. The Administration supported a Higher Education Act Amendment authorizing a multi-year promissory note that would improve services and reduce costs in both programs. OSFA is now working with the FFEL community to implement a standard master promissory note for both loan programs.

OSFA understands the need for accurate, up-to-date data to manage both loan portfolios. The development of the National Student Loan Data System, as called for in statute, has been a major achievement that has resulted in significant savings to taxpayers, preventing the award of over $1 billion in loans and grants to ineligible students. Nonetheless, OSFA also recognizes the need to work with our partners to further enhance the reliability NSLDS, to ensure it has accurate information on which to base management decisions.

Conclusion

In sum, OSFA views itself as both a leader and a partner working with the FFEL loan industry to improve how we serve students, schools, and taxpayers. While the two programs will continue to compete to provide the best services, the two can also benefit from collaboration in areas of mutual interest. Through the Customer Service Task Force, the Modernization Blueprint, our upcoming reorganization, and the development of our five-year performance plan, OSFA is charting a course designed to improve the effectiveness and efficiency of both student loan programs.